Following a five-year halt initially implemented during the COVID-19 pandemic, debt collections on federal student loans that have fallen into default have begun as of Monday.
With the adjustment, over 5 million Americans who were in default prior to or during the freeze may now be subject to collection measures including wage garnishment and the seizure of federal benefits like Social Security payments or tax refunds.
However, given the recent actions of the Trump administration, not all borrowers will experience adjustments to their loans.
In addition to beginning collections, the Trump administration has advanced a more comprehensive restructuring of the federal student loan system that involves altering the contracting and regulatory framework for loan services.
The Trump administration claims that the modifications are meant to lessen taxpayer burden, guarantee repayment compliance, and enhance transparency.
These actions mark a departure from the more lax policies of the Biden administration and a return to pre-pandemic enforcement.
The Treasury Offset Program, which enables the government to collect past-due debt by seizing federal income tax refunds and deducting Social Security or other federal benefits, is once again applicable to federal borrowers who are still in default. Additionally, administrative wage garnishment has resumed.
Significant effects have already been felt when the so-called “on-ramp” protection period ended in September 2024.
Data from the Education Department shows that 15.6% of borrowers of federal student loans are now past due. As collections resume, this number is anticipated to increase.
Missed payments can cause borrowers’ credit scores to plummet, which could make it more difficult for them to get auto or home loans.
However, certain student loan borrowers will not be affected by the latest amendments made by the Department of Education.
The May 5 change does not affect those with private loans because the department solely manages federal loans.
Since private loans typically have shorter grace periods than federal loans, borrowers with private loans have already begun to face repercussions for late payments.
Third-party debt collectors usually take a slightly more active approach to collection, and during the past few years, private loan borrowers have already witnessed a decline in their credit scores if they are unable to make payments.
After 30 days, collection firms usually notify credit bureaus of the late payment. Additionally, you may be sued by the collector, which would increase the amount of your student loan.
Although borrowers have generally had stronger legal protections when it comes to federal loans, the Department of Education’s recent action might have a major negative impact on these borrowers’ financial situations in the months to come.
In the upcoming weeks, borrowers who are in default should anticipate receiving direct communication from the Department of Education or affiliated organizations.
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They will be given information about repayment plans or rehabilitation as ways to prevent evictions.
Tax offsets and wage garnishments will be implemented this summer, and collections will increase for those who do nothing. If action is not taken immediately, those who rely on government benefits may also experience automatic deductions.
Larger student loan forgiveness is not in the cards, as McMahon has repeatedly stated.
